An interview with Dave Napalo, head of Foreign Exchange Risk Management, Wells Fargo.

What recent events caused treasurers to focus more on FX risk than they used to?

The three-month period in 2008 when multinational companies experienced a 25% fluctuation in foreign currencies against the U.S. dollar certainly highlighted the importance of managing FX risk.

How can companies benefit from FX risk management?

It's difficult to achieve stable, predictable financial results when foreign exchange is fluctuating wildly. The more business your company does overseas, the greater the impact of foreign exchange volatility. By minimizing that risk, you're better positioned to achieve the performance expected by shareholders.

Why is prioritizing transparency important for companies in managing their FX risk?

There's an almost universal desire for companies to gain transparency into the operations at all their foreign subsidiaries. Transparency enables you to gather data more quickly in order to make decisions that truly reflect your organization’s risk management objectives.

What do many companies overlook when doing business globally?

A step many companies miss as they begin doing business in foreign markets is establishing their risk management objectives. They see the upside without considering the impact that volatility in foreign exchange could have both on short-term performance and the larger objectives of their organizations.

What can companies do to prevent this oversight?

A comprehensive risk and benefit analysis can help you arrive at a nuanced understanding and common philosophy about acceptable levels of risk.

In looking at those risk and benefit trade-offs, an increasing number of companies are using foreign exchange options to manage foreign exchange risk. Instead of trying to predict the future, which is inherently unknown, they use foreign exchange options to prepare for a variety of possible adverse outcomes while trying to maximize good outcomes.

What is the key to success for companies that effectively manage FX risk?

Once you understand the potential impact of FX fluctuations on your business and have set your risk management objectives, it's important to monitor and measure currency fluctuations from a competitive standpoint. Some fluctuations may be disadvantageous to a U.S. corporation but advantageous to a competitor headquartered in another country — or just the opposite. Companies that understand the subtleties of those dynamics, have plans for addressing them, and then stick to their plans tend to be the most successful at managing FX risk.

What are some best practices?

At Wells Fargo, we recommend that companies consider centralizing the management of FX risk whenever possible. This enables your organization to see the entire picture, enact standards, and achieve economies of scale by consolidating positions and reducing the number of trades normally required to collect those positions.

We also encourage you to develop a clearly stated philosophy about risk and benefit trade-offs, while also coming to a consensus around your company’s risk management objectives.
Finally, we recommend that you put a plan in place that identifies and prioritizes exposures. Your plan should also provide a way of analyzing the risks and benefits of currency positions that guides all decision making with respect to executing hedges against them.